The oil price/Dead cat rally

The oil price

Dead cat rally

The price of oil has bounced. But a recovery is some way off

Mar 10th 2015 | Business and finance/The Economist

STRONG demand and tight supply have stoked a rise in the oil price. Last week, it reached more than $60 for Brent (the benchmark price for North Sea oil) and $50 for West Texas Intermediate, the main American price. Last year’s downward slide seems over. Goldman Sachs, a bank which was forecasting oil at $40 for the next two quarters, now says the risk is “skewed to the upside”, meaning that the likely price is higher.

Some of the factors behind this bounce are temporary. Unrest in Libya and sandstorms in Iraq have hit production. America had an unusually cold winter, and Brazil has a drought, boosting demand. But these disruptions will pass—or in Libya’s case cannot get much worse. OPEC production is likely to recover. The cartel of oil-exporting countries shows no sign of flinching from its decision last year to keep market share by maintaining production. A short period of pain now, the body’s Gulf masterminds reckon, is better than a drawn-out one.

But if the aim is to dent non-OPEC production, it is proving an elusive goal. Production is up in Russia and Brazil, and continuing even in Nigeria. Most importantly, lower prices are not crippling American production of “light tight” oil from the shale beds of North Dakota, Ohio and other places. The least profitable drillers are going bust—but others are ploughing ahead. The price of labour and equipment is plummeting, and finance is still abundant. More productivity gains lie ahead, with better fracking and horizontal-drilling techniques.

A new report by RFC Ambrian, a consultancy, reckons that American tight-oil production will continue to rise in the first half of this year. Figures from the Energy Information Administration, a United States government thinktank, show that efficiency gains in the past years have already been “phenomenal” it says. In January 2007 the average Bakken region rig brought on 112 bpd (barrels per day) of new oil production per month. In January 2014 the figure was 452 bpd, and 547 bpd by December. So although the rig count is falling, increased productivity at the remaining ones more than makes up the difference. As a result, RFC Ambrian terms the recent rally a “false dawn” and thinks Brent could fall back to $40 by the summer.

Meanwhile storage facilities are still awash with the black stuff. And oilmen are scrambling to rent more—including oil tankers. That should cushion any small supply shocks that may appear over the next few months. As a result, economic growth is perking up across the industrialised world. American manufacturing is feasting on cheap energy, and gas-guzzling cars are looking ever-more affordable for motorists. This will produce a surge in demand for energy and should eventually tighten the market.  But not for a while. Most analysts reckon it will be five to eight months before the oil price starts a sustainable recovery.